2014

Bank Mutual Corporation Reports Increased Earnings

MILWAUKEE, Jan. 17, 2013 /PRNewswire/ -- Bank Mutual Corporation (NASDAQ: BKMU) reported net income of $2.3 million or $0.05 per diluted share in the fourth quarter of 2012, which was an $883,000 or 62.1% improvement over the same quarter in 2011.  Bank Mutual Corporation ("Bank Mutual") had net income of $1.4 million or $0.03 per diluted share in the prior year quarter.  On a full-year basis Bank Mutual reported net income of $6.8 million or $0.15 per diluted share in 2012 compared to a net loss of $47.6 million or $1.03 per diluted share in 2011.  The loss in 2011 was primarily caused by a $52.6 million non-cash goodwill impairment in the second quarter of that year.  Excluding the impairment, Bank Mutual's earnings in 2011 would have been $5.0 million or $0.11 per diluted share.  Bank Mutual also announced that its non-performing assets declined to $39.8 million or 1.64% of total assets at December 31, 2012.

Michael T. Crowley, Jr., Chairman and Chief Executive Officer of Bank Mutual noted, "Our quarterly earnings continued to improve as we have stayed on course with strategies to enhance our earning asset mix and our funding mix."  Mr. Crowley added, "Confidence in our recent earnings trend enabled us to increase our dividend to shareholders to two cents per share during the fourth quarter."  David A. Baumgarten, President of Bank Mutual, also commented, "With asset quality concerns continuing to diminish, our attention will be even more focused on the strategies necessary to increase our revenue and control our expenses."

Bank Mutual's net interest income increased by $854,000 or 5.6% during the fourth quarter of 2012 compared to the same quarter in 2011.  Bank Mutual's net interest margin during the fourth quarter of 2012 was higher than it was in the same quarter of 2011, increasing to 2.86% in the most recent quarter compared to 2.66% in the latter. This improvement was due in part to the repayment of $100.0 million in high-cost borrowings from the Federal Home Loan Bank ("FHLB") of Chicago that matured in the third quarter of 2012.  Also contributing to the increase in the net interest margin, however, was an improved earning asset mix in the fourth quarter of 2012 compared to the same quarter in 2011.  During the fourth quarter of 2012 average total loans, which typically generate higher yields than other earning assets, increased by $35.3 million or 2.6% compared to the same quarter in 2011.  In contrast, Bank Mutual's average investment in mortgage-related securities, overnight investments, and other investments, which typically generate lower yields than the loan portfolio, declined by $74.6 million or 8.2% in the aggregate.

On a full-year basis, Bank Mutual's net interest income declined by $1.2 million or 1.9% in 2012 compared to 2011.   This decline was primarily attributable to a decrease in Bank Mutual's net interest margin, which was 2.67% in 2012 compared to 2.76% in 2011.  This decline was primarily the result of a lower interest rate environment in 2012, which reduced the return on Bank Mutual's earning assets more than the cost of its funding sources.   This development was partially offset by the favorable impact of higher average earning assets in 2012, as well as the repayment of the aforementioned high-cost borrowings from the FHLB of Chicago.  Earlier in 2012 Bank Mutual purchased $158.9 million in held-to-maturity securities that were funded by term borrowings from the FHLB of Chicago.  In addition, during 2012 average total loans increased by $21.9 million or 1.6% compared to 2011.   

Bank Mutual's provision for loan losses was $2.1 million in the fourth quarter of 2012 compared to $1.6 million in the same quarter last year.  In all of 2012 the provision for loan losses was $4.5 million compared to $6.7 million in 2011.  During the fourth quarter of 2012 Bank Mutual recorded loss provisions of $1.9 million against a number of multi-family, commercial real estate, and business loan relationships, as well as residential and consumer loans.   In addition, Bank Mutual recorded $232,000 in additional loss provisions related in part to a modest increase in charge-off experience on its one- to four-family loan portfolio, which had a corresponding impact on the factor Bank Mutual uses to compute its loan loss allowance against such portfolio.

During the fourth quarter of 2011, Bank Mutual recorded $1.5 million in additional loss provisions against two large loan relationships that aggregated $8.4 million and also recorded $1.6 million in loss provisions against a number of smaller multi-family, commercial real estate, and business loan relationships, as well as certain residential and consumer loans.  In addition, during the fourth quarter of 2011 Bank Mutual recorded approximately $1.4 million in additional loss provision that reflected management's general concerns at that time related to continued economic weakness, lower real estate values, and the internal downgrades of certain loans.  The impact of these developments was partially offset by $2.9 million in loss recaptures during the quarter related to the improved performance and/or prospects for certain loan relationships.

On a full-year basis in 2012 Bank Mutual recorded loss provisions of $6.3 million against a number of multi-family, commercial real estate, and business loan relationships, as well as residential and consumer loans.  This development was partially offset by $1.8 million in loss recaptures related to non-performing loans that paid off during the period and to recoveries related to previously charged-off loans. 

On a full-year basis in 2011 Bank Mutual recorded $11.8 million in loss provisions against a number of multi-family, commercial real estate, and business loan relationships and certain smaller residential and consumer loans.  In addition, during 2011 Bank Mutual recorded approximately $2.4 million in additional loss provision that reflected management's general concerns at the time related to continued economic weakness, lower real estate values, and the internal downgrades of certain loans.  These developments were partially offset by $7.5 million in loss recaptures on loans that were paid-off during the period, were upgraded to performing status, or improved in performance and/or prospects. 

Bank Mutual's provision for loan losses was lower in 2012 than it was in 2011.  This trend is consistent with recent declines in Bank Mutual's non-performing loans and classified loans, as described below, and is consistent with general trends in the banking industry.   It should be noted, however, that Bank Mutual's loan portfolio continues to be impacted by slow economic growth, persistent unemployment, and low real estate values.  These conditions are particularly challenging for borrowers whose loans are secured by commercial real estate, multi-family real estate, and land. As such, there can be no assurances that non-performing loans and/or classified loans will continue to trend lower in future periods or that Bank Mutual's provision for loan losses will not vary considerably in future periods.  

Service charges on deposits increased by $129,000 or 7.5% during the three months ended December 31, 2012, compared to the same period in 2011.   During the twelve months ended December 31, 2012, this revenue item increased by $474,000 or 7.4% compared to the same period in 2011.  Management attributes these improvements to an increase in Bank Mutual's average checking account balances, which increased by $39.1 million or 12.6% during the twelve months ended December 31, 2012, compared to the same period in the previous year.  In addition, enhancements in recent periods to Bank Mutual's commercial deposit products and services generated increased fee revenue in the 2012 periods, particularly related to treasury management services.

Brokerage and insurance commissions were $786,000 during the fourth quarter of 2012, a $153,000 or 24.2% increase from the same period in the previous year.  On a full-year basis, this source of revenue was $3.0 million in 2012, a $165,000 or 5.8% increase from the same period in 2011.  This revenue item consists of commissions earned on sales of tax-deferred annuities, mutual funds, and certain other securities, as well as personal and business insurance products.  Commission revenue in the 2012 periods benefited from a lower interest rate environment that encouraged many customers to purchase tax-deferred annuities due to higher returns compared to deposit-related products.

Net loan-related fees and servicing revenue was $437,000 during the three months ended December 31, 2012, compared to $50,000 in the same period of the previous year.   Net loan-related fees and servicing revenue was a loss of $1.9 million during the twelve months ended December 31, 2012, compared to a loss of $402,000 in the same period of 2011.  The following table presents the components of this income statement line item for the periods indicated: 

 


Three Months Ended

December 31


Twelve Months Ended

December 31


2012

2011


2012

2011


(Dollars in thousands)

Gross servicing fees

$722

$679


$2,826

$2,718

Mortgage servicing rights amortization

(900)

(1,029)


(3,904)

(2,747)

Mortgage servicing rights valuation (loss) recovery

391

235


(1,528)

(862)

    Loan servicing revenue, net

213

(115)


(2,606)

(891)

Other loan fee income

224

165


695

489

    Loan-related fees and servicing revenue, net

$437

$50


$(1,911)

$(402)

 

Gross servicing fees increased in the 2012 periods due to an increase in the amount of loans Bank Mutual services for third-party investors.  During 2012 and 2011 Bank Mutual serviced an average of $1.13 billion and $1.09 billion in loans for third-party investors, respectively.  Loans serviced for third-party investors have increased in recent periods due to increased sales of loans by Bank Mutual in the secondary market, as described below.  Bank Mutual generally retains the servicing on these loans.  Related amortization of mortgage servicing rights ("MSRs") increased in the 2012 full-year period due to lower market interest rates for one- to four-family mortgage loans, which resulted in increased loan prepayments and faster amortization of the MSRs relative to 2011.  Amortization declined slightly in the fourth quarter of 2012 compared to the same period in 2011 due to lower relative loan prepayments between the periods.  Management believes this development was caused by a reduced population of potential borrowers that have not already taken advantage of the recent decline in market rates and refinanced their loans. 

Loan-related fees and servicing revenue is also impacted by changes in the valuation allowance that is established against MSRs.   The change in this allowance is recorded as a recovery or loss, as the case may be, in the period in which the change occurs.   Generally lower market interest rates in 2012 and 2011 resulted in higher prepayment expectations, which caused increases in the MSR valuation allowance during these full year periods.  In contrast, slightly higher market interest rates during the quarter periods in both years resulted in modest recoveries of previously established valuation allowances in such periods.  As of December 31, 2012, Bank Mutual had a valuation allowance of $2.4 million against MSRs with a gross book value of $9.2 million.  As of the same date Bank Mutual serviced $1.1 billion in loans for third-party investors compared to a similar amount one year ago.

Gains on sales of loans were $3.3 million in the fourth quarter of 2012 compared to $2.6 million in the same quarter last year.  In all of 2012 gains on sales of loans were $13.2 million compared to $6.0 million in 2011.  Bank Mutual policy is to sell substantially all of the fixed-rate, one- to four-family mortgage loans that it originates in the secondary market.  During the three and twelve months ended December 31, 2012, sales of these loans were $40.4 million or 28.3% lower and $161.9 million or 55.3% higher than they were during the same periods of 2011, respectively.   Management attributes the full-year increase to lower market interest rates for one- to four-family mortgage loans, which encouraged borrowers to refinance higher-rate loans into lower-rate loans during 2012.  Management attributes the decline in loan sales during the fourth quarter of 2012 to a reduced population of potential borrowers that have not already taken advantage of the recent decline in market rates and refinanced their loans.  Also contributing to the increase in gains on sales of loans in the 2012 periods was an improvement in Bank Mutual's average gross profit margin on the sales of loans.  Management attributes this improvement to the burden that increased consumer demand has placed on the loan production capacity of the mortgage banking industry as a whole, which has caused gross profit margins to increase. 

Market interest rates for one- to four-family mortgage loans have increased in recent weeks and the pace of loan originations and sales at Bank Mutual has diminished.   Bank Mutual has also experienced a decline in its gross profit margin on individual loan sales in recent weeks as production capacity within the mortgage banking industry has become less constrained.  Absent a further decline in market interest rates for one- to four-family mortgage loans, management believes Bank Mutual's gains on sales of loans will be substantially lower in 2013 than it was in 2012.  However, management believes the impact of lower gains on sales of loans will be partially offset by continued recovery of previously established MSR valuation allowances, as previously noted, as well as lower MSR amortization.  However, there can be no assurances.

Bank Mutual recorded $543,000 in gains on sales of investments during the twelve months ended December 31, 2012.  During this period Bank Mutual sold $20.4 million in mortgage-related securities.  The purpose of this sale was to provide additional liquidity to fund the repayment of $100.0 million in borrowings from the FHLB of Chicago that matured during the third quarter, as previously described.  During the twelve months ended December 31, 2011, Bank Mutual recorded $1.1 million in net gains on sales of investments.  In that period Bank Mutual sold a $20.8 million investment in a mutual fund that management did not expect would perform well in future periods.  

During the three and twelve month periods ended December 31, 2012, Bank Mutual recorded $64,000 and $400,000 in net other-than-temporary impairment ("OTTI") losses, respectively.  In all of 2011 Bank Mutual recorded $389,000 in such losses.  These losses consisted of the credit portion of the total OTTI loss related to Bank Mutual's investment in certain private-label collateralized mortgage obligations ("CMOs") rated less than investment grade. Management attributes the net OTTI losses in these periods to low real estate values for residential properties on a nationwide basis.  None of Bank Mutual's remaining private-label CMOs were deemed to be other-than-temporarily impaired as of December 31, 2012.  However, the collection of the amounts due on private-label CMOs is subject to numerous factors outside of Bank Mutual's control and a future determination of OTTI could result in additional losses being recorded through earnings in future periods.   As of December 31, 2012, Bank Mutual's total investment in private-label CMOs was $50.6 million, of which $35.9 million was rated less than investment grade. 

The increase in the cash surrender value of life insurance investments during the fourth quarter of 2012 was $207,000 or 27.7% lower than it was in the same quarter in 2011.  During the full year, the increase in cash surrender value was $256,000 or 10.8% lower in 2012 than it was in 2011.  Management attributes these decreases to a lower interest rate environment in 2012 that has reduced the return on this type of investment, as well as lower payouts associated with excess death benefits.

Other non-interest income was $1.3 million and $5.8 million during the three and twelve months ended December 31, 2012, respectively, compared to $1.4 million and $5.2 million during the same periods in 2011, respectively.  The increase in the 2012 full-year period was due primarily to an increase in the fair value of assets held in trust for certain non-qualifying employee benefit plans, due to the effects of lower interest rates and improved equity markets.     

Compensation-related expenses increased by $366,000 or 3.6% and by $3.5 million or 8.9% during the three and twelve months ended December 31, 2012, respectively, compared to the same periods in 2011, respectively.  These increases were due primarily to the hiring of additional commercial relationship managers and other key personnel in recent periods, as well as normal annual merit increases.  Also contributing was an increase in certain incentive and bonus payments during these periods, including stock based compensation.   Finally, the increases were also caused by an increase in costs related to Bank Mutual's defined benefit pension plan, due to a decline in the discount rate used to determine the present value of the pension obligation. 

Occupancy and equipment expenses decreased by $90,000 or 3.1% and $151,000 or 1.3% during the three and twelve months ended December 31, 2012, respectively, compared to the same periods in 2011, respectively.  These decreases were principally caused by lower utility and snow removal costs due to a mild winter, reduced expenditures for maintenance and repair, and lower rental expense due to the closure of three leased banking offices.  The impact of these developments was partially offset by an increase in data processing costs due to certain product and system enhancements implemented in 2012.

Federal deposit insurance premiums increased by $75,000 or 10.8% and by $84,000 or 2.6% during the three and twelve months ended December 31, 2012, respectively, compared to the same periods in 2011, respectively.   These increases were due in part to certain credits that were posted against this expense in 2011 that were not applicable to 2012.  Also contributing to the full-year increase in 2012 were higher average total assets earlier in the year compared to 2011.  In the second quarter of 2011 the Federal Deposit Insurance Corporation ("FDIC") implemented a new rule that changed the deposit insurance assessment base from an insured institution's domestic deposits (minus certain allowable exclusions) to an insured institution's average total assets (minus average tangible equity and certain other adjustments).    

Advertising and marketing expenses decreased by $88,000 or 11.3% during the three months ended December 31, 2012, compared to the same period in the prior year.  On a full-year basis, advertising and marketing expenses increased by $131,000 or 6.5% in 2012 compared to the same period in 2011.   These changes were primarily caused by differences in the timing of Bank Mutual's advertising and marketing efforts between the 2012 and 2011 periods. 

Net losses and expenses on foreclosed properties were $1.2 million and $6.7 million during the three and twelve months ended December 31, 2012, respectively, compared to $1.7 million and $7.1 million in the same periods of the prior year, respectively.  Although declining in recent periods, Bank Mutual's losses and expenses on foreclosed real estate have been elevated in recent years due to low real estate values and slow economic growth.

Other non-interest expense was $2.5 million and $10.2 million during the three and twelve months ended December 31, 2012, respectively, compared to $2.5 million and $9.7 million during the same periods in 2011, respectively.  The increase in the 2012 full-year period was primarily the result of higher costs for legal, consulting, and accounting fees related to loan workout efforts and related professional services.  In recent months, however, these expenses have declined as Bank Mutual has reduced its level of non-performing loans. 

Income tax expense was $1.2 million and $516,000 during the three months ended December 31, 2012 and 2011, respectively, and was $3.3 million and $1.8 million during the twelve months ended as of the same dates, respectively.   Bank Mutual's effective tax rate ("ETR") for the three months ended December 31, 2012 and 2011, was 34.9% and 26.8%, respectively.  Excluding the 2011 goodwill impairment from income (loss) before taxes (which is not deductible for income tax purposes), Bank Mutual's ETR for the full-year periods in 2012 and 2011 was 33.2% and 26.1%, respectively.   Bank Mutual's ETR increased in the 2012 periods because non-taxable revenue, which consists primarily of earnings from bank-owned life insurance ("BOLI"), comprised a smaller portion of pre-tax earnings in 2012 than it did in 2011. 

Bank Mutual's total assets decreased by $80.2 million or 3.2% during the twelve months ended December 31, 2012.  During the year Bank Mutual's available-for-sale securities declined by $231.6 million, its cash and cash equivalents declined by $33.9 million, its investment in common stock of the FHLB of Chicago (which is included in other assets) declined by $30.3 million, its foreclosed and repossessed assets declined by $10.8 million, and its loans held-for-sale declined by $8.5 million.  These developments were partially offset by an $82.6 million increase in the loan portfolio.  Net cash flows from the changes in these assets were used to fund a $153.8 million decline in deposit liabilities during the twelve month period, as well as the repayment of a $100.0 million term advance from the FHLB of Chicago.  In addition, during 2012 Bank Mutual funded a $157.6 million increase in securities held-to-maturity using term advances from the FHLB of Chicago. 

The decrease in Bank Mutual's available-for-sale securities during the twelve months ended December 31, 2012, was due primarily to periodic repayments and security sales that exceeded Bank Mutual's purchase of new available-for-sale securities.  The increase in Bank Mutual's held-to-maturity securities during the same period was due to the purchase of $158.9 million in mortgage-backed securities issued and guaranteed by the Federal National Mortgage Association ("Fannie Mae") and backed by multi-family residential loans.  Bank Mutual funded the purchase of these securities with $158.9 million in new term borrowings from the FHLB of Chicago.  These new term advances were partially offset by the repayment during the third quarter of a $100.0 million advance from the FHLB of Chicago that matured during the period.. 

During the twelve months ended December 31, 2012, loans receivable increased by $82.6 million or 6.3%.   Total loans originated for portfolio increased by $164.8 million or 41.5% during this period compared to the same period in 2011.   A portion of this improvement came from increased originations of commercial business loans, which increased by $40.5 million or 57.6% during the  twelve months ended December 31, 2012, compared to the same period in 2011.  Management attributed this increase to recent efforts to improve Bank Mutual's share of the mid-tier commercial banking market (defined as business entities with sales revenues of $5 to $100 million), which was a new market segment for Bank Mutual in 2011.  In the past two years Bank Mutual has added experienced leaders to its senior management team and has hired a number of commercial relationship managers and support personnel experienced in managing and selling financial services to the mid-tier commercial banking market. In the near term Bank Mutual expects to add additional professionals capable of serving this market segment, although there can be no assurances as to the extent or timing of such staff additions or the impact on operating results.

Originations of multi-family mortgage loans, both permanent and construction, also increased substantially during the period, which management believes reflects a general decline in the level of home ownership in recent periods.  Finally, originations of consumer loans, which consist principally of home equity term loans and lines of credit, increased by $23.7 million or 25.8% during the twelve months ended December 31, 2012, due to more competitive pricing and increased marketing efforts for these types of loans.

During the twelve months ended December 31, 2012, Bank Mutual's investment in the common stock of the FHLB of Chicago, which is included in other assets, declined from $46.1 million at December 31, 2011, to $15.8 million at December 31, 2012.  During this period the FHLB of Chicago redeemed $30.3 million of excess common stock held by Bank Mutual in accordance with a redemption plan announced in December 2011.  Under this plan, the FHLB of Chicago has stated that it intends to redeem additional excess common stock in quarterly increments through the end of 2013.  However, the amount and timing of these redemptions, if any, depend on many factors outside the control of Bank Mutual or the FHLB of Chicago.  As of December 31, 2012, Bank Mutual owned approximately $5.3 million more in FHLB of Chicago common stock than it would otherwise be required to own under minimum guidelines established by the FHLB of Chicago. 

Bank Mutual's deposit liabilities decreased by $153.8 million or 7.6% during the twelve months ended December 31, 2012.  Core deposits, consisting of checking, savings and money market accounts, increased by $77.3 million or 7.9% during the period whereas certificates of deposits declined by $231.0 million or 22.2%.  Bank Mutual continues to closely manage the rates it offers on certificates of deposit to control its overall liquidity position, which has resulted in a decline in certificates of deposit in recent periods.  Core deposits have increased in recent years in response to management's efforts to increase sales of such products and related services to commercial businesses, as well as efforts to focus its retail sales efforts on such products and related services.  Also contributing to the increase in core deposits in recent periods, however, is customer reaction to the low interest rate environment.  Management believes that this environment has encouraged some customers to switch to core deposits in an effort to retain flexibility in the event interest rates rise in the future.

Bank Mutual's shareholders' equity increased from $265.8 million at December 31, 2011, to $271.9 million at December 31, 2012.  This increase was caused by net income during the period, as well as lower accumulated other comprehensive loss due in part to an increase in the fair value of available-for-sale securities.   These developments were partially offset by the payment of regular cash dividends to shareholders during the year.  The book value of Bank Mutual's common stock was $5.87 per share at December 31, 2012, compared to $5.75 per share at December 31, 2011.   

Bank Mutual's ratio of shareholders' equity to total assets was 11.24% at December 31, 2012, compared to 10.64% at December 31, 2011.  The increase in this ratio was due primarily to a decrease in Bank Mutual's total assets, as well as an increase in shareholders' equity, as described in previous paragraphs.  Bank Mutual's subsidiary bank is "well capitalized" for regulatory capital purposes.  As of September 30, 2012 (the latest information available), the subsidiary bank had a total risk-based capital ratio of 17.91% and a Tier 1 capital ratio of 9.93%.  The minimum ratios to be considered "well capitalized" under current supervisory regulations are 10% for total risk-based capital and 6% for Tier 1 capital.  The minimum ratios to be considered "adequately capitalized" are 8% and 4%, respectively.   

Bank Mutual's capital measures remain strong as of December 31, 2012.  However, federal banking regulators have continued to focus on the capital levels of financial institutions such as Bank Mutual's bank subsidiary.   In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") will eventually impose specific capital requirements on savings and loan holding companies such as Bank Mutual.  These developments, and other requirements imposed by regulators (including the existing memoranda of understanding Bank Mutual and its banking subsidiary have with regulators), as well as proposed rules in response to the new Basel III international capital standards, may impact the ability of Bank Mutual and/or its subsidiary bank to pay dividends or, in the case of Bank Mutual, repurchase stock.

Bank Mutual's non-performing loans declined by $49.3 million or 65.7% during the twelve months ended December 31, 2012.  Non-performing assets, which include non-performing loans, declined by $60.1 million or 60.2% during this same period.   Finally, loans classified by Bank Mutual as "special mention" and "substandard," which includes all non-performing loans, declined by $59.9 million or 38.6% in the aggregate during the twelve months ended December 31, 2012.  The decline in Bank Mutual's non-performing and classified loans during the twelve months ended December 31, 2012, was due to loans that were paid off or upgraded during the period, as well as loans that were partially charged off because Bank Mutual had commenced and/or completed foreclosure proceedings during the period.   In addition, foreclosed properties and repossessed assets declined by $10.8 million or 43.5% during the twelve months ended December 31, 2012, due to sales of foreclosed real estate, as well as continued charge-offs of foreclosed properties.  These developments were partially offset by foreclosures related to a number of smaller commercial real estate mortgage loans and, to a lesser extent, one- to four-family mortgage loans. 

Bank Mutual's non-performing loans and assets have declined substantially in recent periods.  However, this trend is subject to many factors that are outside of Bank Mutual's control, such as economic and market conditions.  As such, there can be no assurances that Bank Mutual's non-performing loans and assets will continue to trend lower in future periods or that its provision for loan losses will not increase.

Bank Mutual's allowance for loan losses was $21.6 million or 1.54% of total loans at December 31, 2012, compared to $27.9 million or 2.12% of total loans at December 31, 2011.  As a percent of non-performing loans, Bank Mutual's allowance for loan losses was 83.6% at December 31, 2012, compared to 37.2% at December 31, 2011.  The decrease in the dollar amount of the allowance was principally caused by $10.9 million in net charge-offs during the period.  Most notably, Bank Mutual charged off $5.8 million related to five multi-family and commercial real estate loan relationships that aggregated $16.5 million on which management commenced and/or completed foreclosure proceedings during the period.  The impact of charge-offs during the period was partially offset by $4.5 million in provision for loan losses that was recorded in the allowance during the twelve months ended December 31, 2012, as previously described. 

Management believes the allowance for loan losses at December 31, 2012, was adequate to cover probable and estimable losses in Bank Mutual's loan portfolio as of that date.  However, future increases to the allowance may be necessary and results of operations could be adversely affected if future conditions differ from the assumptions used by management to determine the allowance for loan losses as of the end of the period. 

Bank Mutual Corporation is the fourth largest financial institution holding company headquartered in the state of Wisconsin and its stock is quoted on the NASDAQ Global Select Market under the symbol "BKMU".  Its subsidiary bank, Bank Mutual, operates 75 banking locations in the state of Wisconsin and one in Minnesota.

Cautionary Statements

The discussion in this earnings release contains or incorporates by reference various forward-looking statements concerning Bank Mutual's prospects that are based on the current expectations and beliefs of management.  Forward-looking statements may contain, and are intended to be identified by, words such as "anticipate," "believe," "estimate," "expect," "objective," "projection," "intend," and similar expressions; the use of verbs in the future tense and discussions of periods after the date on which this report is issued are also forward-looking statements.  The statements contained herein and such future statements involve or may involve certain assumptions, risks, and uncertainties, many of which are beyond Bank Mutual's control, that could cause Bank Mutual's actual results and performance to differ materially from what is stated or expected.  In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could impact the business and financial prospects of Bank Mutual:  general economic conditions, including volatility in credit, lending, and financial markets; declines in the real estate market, which could further affect both collateral values and loan activity; continuing relatively high unemployment and other factors which could affect borrowers' ability to repay their loans; negative developments affecting particular borrowers, which could further adversely impact loan repayments and collection; legislative and regulatory initiatives and changes, including action taken, or that may be taken, in response to difficulties in financial markets and/or which could negatively affect the rights of creditors; monetary and fiscal policies of the federal government; the effects of further regulation and consolidation within the financial services industry, including substantial changes under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"); regulators' increasing expectations for financial institutions' capital levels and restrictions imposed on institutions, as to payments of dividends or otherwise, to maintain or achieve those levels, including the possible effects of the memoranda of understanding mentioned in this report or potential new regulatory capital requirements under Basel III; pending and/or potential rulemaking or other actions by the Consumer Financial Protection Bureau ("CFPB"); potential regulatory or other actions affecting Bank Mutual or its subsidiary bank; potential changes in Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), which could impact the home mortgage market; increased competition and/or disintermediation within the financial services industry; changes in tax rates, deductions and/or policies; potential further changes in FDIC premiums and other governmental assessments; changes in deposit flows; changes in the cost of funds; fluctuations in general market rates of interest and/or yields or rates on competing loans, investments, and sources of funds; demand for loan or deposit products; illiquidity of financial markets and other negative developments affecting particular investment and mortgage-related securities, which could adversely impact the fair value of and/or cash flows from such securities; changes in customers' demand for other financial services; Bank Mutual's potential inability to carry out business plans or strategies; changes in accounting policies or guidelines; natural disasters, acts of terrorism, or developments in the war on terrorism; the risk of failures in computer or other technology systems or data maintenance, or breaches of security relating to such systems; and the factors discussed in Bank Mutual's filings with the Securities and Exchange Commission, particularly under Part I, Item 1A, "Risk Factors," of Bank Mutual's 2011 Annual Report on Form 10-K.

 

 Bank Mutual Corporation and Subsidiaries 

 Unaudited Consolidated Statements of Financial Condition 

 (Dollars in thousands, except per share data) 



December 31


December 31


2012


2011

 ASSETS 




 Cash and due from banks 

$50,030


$52,306

 Interest-earning deposits 

37,029


68,629

   Cash and cash equivalents 

87,059


120,935

 Mortgage-related securities available-for-sale, at fair value 

550,185


781,770

 Mortgage-related securities held-to-maturity, at amortized cost (fair value of $163,589 in 2012) 

 

157,558


 

-

 Loans held-for-sale 

10,739


19,192

 Loans receivable (net of allowance for loan losses of $21,577 in 2012 and $27,928 in 2011) 

 

1,402,246


 

1,319,636

 Foreclosed properties and repossessed assets 

13,961


24,724

 Mortgage servicing rights, net 

6,821


7,401

 Other assets 

189,695


224,826





     Total assets 

$2,418,264


$2,498,484





 LIABILITIES AND EQUITY 




 Liabilities: 




   Deposit liabilities 

$1,867,899


$2,021,663

   Borrowings 

210,786


153,091

   Advance payments by borrowers for taxes and insurance 

4,956


3,192

   Other liabilities 

59,837


51,842

     Total liabilities 

2,143,478


2,229,788

 Equity: 




   Preferred stock - $0.01 par value: 




     Authorized - 20,000,000 shares in 2012 and 2011 




     Issued and outstanding - none in 2012 and 2011 

-


-

   Common stock - $0.01 par value: 




     Authorized - 200,000,000 shares in 2012 and 2011 




     Issued - 78,783,849 shares in 2012 and 2011 




     Outstanding - 46,326,484 shares in 2012 and 46,228,984 in 2011 

788


788

   Additional paid-in capital 

489,960


490,159

   Retained earnings 

145,231


140,793

   Accumulated other comprehensive loss 

(4,717)


(5,379)

   Treasury stock - 32,457,365 shares in 2012 and 32,554,865 in 2011 

(359,409)


(360,590)

     Total shareholders' equity 

271,853


265,771

   Non-controlling interest in real estate partnership 

2,933


2,925

     Total equity including non-controlling interest 

274,786


268,696





     Total liabilities and equity 

$2,418,264


$2,498,484

 

 

 Bank Mutual Corporation and Subsidiaries 

 Unaudited Consolidated Statements of Income 

 (Dollars in thousands, except per share data) 


 Three Months Ended  


 Twelve Months Ended  


 December 31 


 December 31 


2012


2011


2012


2011

 Interest income: 








   Loans 

$16,334


$17,049


$65,478


$69,936

   Mortgage-related securities 

4,081


4,243


17,309


16,374

   Investment securities 

19


34


73


2,877

   Interest-earning deposits 

33


33


162


158

      Total interest income 

20,467


21,359


83,022


89,345

 Interest expense: 








   Deposits 

3,187


4,357


14,655


19,568

   Borrowings 

1,249


1,824


6,984


7,183

   Advance payment by borrowers for taxes and insurance 

1


2


2


5

      Total interest expense 

4,437


6,183


21,641


26,756

      Net interest income 

16,030


15,176


61,381


62,589

 Provision for loan losses 

2,107


1,632


4,545


6,710

      Net interest income after provision for loan losses 

13,923


13,544


56,836


55,879

 Non-interest income: 








   Service charges on deposits 

1,849


1,720


6,903


6,429

   Brokerage and insurance commissions 

786


633


3,009


2,844

   Loan-related fees and servicing revenue, net 

437


50


(1,911)


(402)

   Gain on loan sales activities, net 

3,339


2,558


13,206


5,963

   Gain on sales of investments, net 

-


-


543


1,113

   Other-than-temporary impairment ("OTTI") losses: 








      Total OTTI (losses) gains 

20


-


(889)


(1,794)

      Non-credit portion of OTTI losses (gains) 

(84)


-


489


1,405

         Net OTTI losses 

(64)


-


(400)


(389)

   Increase in cash surrender value of life insurance 

539


746


2,118


2,374

   Other non-interest income 

1,323


1,423


5,791


5,226

      Total non-interest income 

8,209


7,130


29,259


23,158

 Non-interest expense: 








   Compensation, payroll taxes, and other employee benefits 

10,567


10,201


42,304


38,844

   Occupancy and equipment 

2,796


2,886


11,363


11,514

   Federal insurance premiums  

775


700


3,308


3,224

   Advertising and marketing 

693


781


2,139


2,008

   Losses and expenses on foreclosed real estate, net 

1,229


1,670


6,725


7,059

   Other non-interest expense 

2,548


2,508


10,218


9,681

      Total non-interest expense before goodwill impairment 

18,608


18,746


76,057


72,330

   Goodwill impairment 

-


-


-


52,570

      Total non-interest expense 

18,608


18,746


76,057


124,900

      Income (loss) before income tax expense  

3,524


1,928


10,038


(45,863)

 Income tax expense  

1,229


516


3,336


1,752

      Net income (loss) before non-controlling interest 

2,295


1,412


6,702


(47,615)

 Net loss attributable to non-controlling interest 

10


10


52


50

      Net income (loss) 

$2,305


$1,422


$6,754


($47,565)









 Per share data: 








   Earnings (loss) per share-basic  

$0.05


$0.03


$0.15


($1.03)

   Earnings (loss) per share-diluted 

$0.05


$0.03


$0.15


($1.03)

   Cash dividends paid 

$0.02


$0.01


$0.05


$0.06

 

 


 Bank Mutual Corporation and Subsidiaries 

 Unaudited Supplemental Financial Information 

 (Dollars in thousands, except per share amounts and ratios) 












 Three Months Ended  


 Twelve Months Ended  



 December 31 


 December 31 

Loan Originations and Sales


2012


2011


2012


2011

 Mortgage loans originated for portfolio: 









   One- to four-family 


$18,862


$32,211


$88,993


$91,042

   Multi-family 


18,299


27,597


66,724


55,859

   Commercial real estate 


43,249


25,351


70,200


63,376

   Construction and development 


50,777


1,313


109,908


24,921

     Total mortgage loans 


131,187


86,472


335,825


235,198

 Consumer loan originations 


27,766


29,613


115,344


91,685

 Commercial business loan originations 


35,861


5,769


110,941


70,404

      Total loans originated for portfolio 


$194,814


$121,854


$562,110


$397,287










 Mortgage loans originated for sale 


$86,844


$133,208


$446,358


$272,785










 Mortgage loan sales 


$102,025


$142,385


$454,584


$292,720





















December 31


December 31

Loan Portfolio Analysis


2012


2011

 Mortgage loans: 





   One- to four-family 


$465,170


$508,503

   Multi-family  


264,013


247,040

   Commercial real estate  


263,775


226,195

   Construction and development 


128,348


82,008

      Total mortgage loans 


1,121,306


1,063,746

 Consumer loans 


246,913


238,454

 Commercial business loans 


132,436


87,715

   Total loans receivable 


1,500,655


1,389,915

 Allowance for loan losses 


(21,577)


(27,928)

 Undisbursed loan proceeds and deferred fees and costs 

(76,832)


(42,351)

   Total loans receivable, net 


$1,402,246


$1,319,636






 Loans serviced for others 


$1,147,722


$1,102,126

 

 

 Bank Mutual Corporation and Subsidiaries 

 Unaudited Supplemental Financial Information (continued) 

 (Dollars in thousands, except per share amounts and ratios) 








December 31


December 31

Non-Performing Loans and Assets


2012


2011

 Non-accrual mortgage loans: 





     One- to four-family  


$8,192


$14,868

     Multi-family 


6,824


22,905

     Commercial real estate 


6,994


23,997

     Construction and development loans 


937


9,368

         Total non-accrual mortgage loans 


22,947


71,138

 Non-accrual consumer loans: 





     Secured by real estate 


1,514


1,457

     Other consumer loans 


59


207

         Total non-accrual consumer loans 


1,573


1,664

 Non-accrual commercial business loans 


693


1,642

         Total non-accrual loans 


25,213


74,444

 Accruing loans delinquent 90 days or more 


584


696

         Total non-performing loans 


25,797


75,140

 Foreclosed properties and repossessed assets 


13,961


24,724

         Total non-performing assets 


$39,758


$99,864

 Non-performing loans to loans receivable, net 


1.84%


5.69%

 Non-performing assets to total assets 


1.64%


4.00%








December 31


December 31

Special Mention and Substandard Loans


2012


2011

(includes all non-performing loans, above)





 Mortgage loans: 





   One- to four-family 


$8,472


$16,216

   Multi-family  


8,969


32,465

   Commercial real estate  


56,842


79,692

   Construction and development 


15,446


20,259

      Total mortgage loans 


89,729


148,632

 Consumer loans 


1,631


1,695

 Commercial business loans 


4,007


4,920

   Total 


$95,367


$155,247








 Twelve Months Ended December 31 

Activity in Allowance for Loan Losses


2012


2011

 Balance at the beginning of the period 


$27,928


$47,985

 Provision for loan losses 


4,545


6,711

 Charge-offs: 





   One- to four-family  


(3,182)


(3,048)

   Multi-family 


(857)


(5,035)

   Commercial real estate 


(4,894)


(15,286)

   Construction and development loans 


(2,693)


(2,737)

   Consumer loans 


(812)


(1,036)

   Commercial business loans 


(136)


(551)

     Total charge-offs 


(12,574)


(27,693)

    Total recoveries 


1,678


925

      Net charge-offs 


(10,896)


(26,768)

 Balance at the end of the period 


$21,577


$27,928

 Net charge-offs to average loans, annualized 


0.78%


1.96%








December 31


December 31

Allowance Ratios


2012


2011

 Allowance for loan losses to non-performing loans 


83.64%


37.17%

 Allowance for loan losses to total loans 


1.54%


2.12%

 





 Bank Mutual Corporation and Subsidiaries 

 Unaudited Supplemental Financial Information (continued) 

 (Dollars in thousands, except per share amounts and ratios) 








December 31


December 31

Deposit Liabilities Analysis


2012


2011

 Non-interest-bearing checking 


$143,684


$112,211

 Interest-bearing checking 


236,380


229,990

 Savings accounts 


216,798


204,263

 Money market accounts  


459,134


432,248

 Certificates of deposit 


811,903


1,042,951

    Total deposit liabilities 


$1,867,899


$2,021,663

















 Three Months Ended  


 Twelve Months Ended  



 December 31 


 December 31 

Selected Operating Ratios


2012


2011


2012


2011

 Net interest margin (1) 


2.86%


2.66%


2.67%


2.76%

 Net interest rate spread 


2.76%


2.54%


2.57%


2.64%

 Return on average assets 


0.38%


0.23%


0.27%


-1.87%

 Return on average shareholders' equity 


3.37%


2.10%


2.50%


-16.37%

 Efficiency ratio (2) 


76.57%


84.04%


84.04%


85.07%

 Non-interest expense as a percent of average assets (3) 

3.03%


3.01%


3.03%


2.84%

 Shareholders' equity to total assets at end of period 


11.24%


10.64%


11.24%


10.64%

(1)

Net interest margin is determined by dividing net interest income by average earning assets for the periods indicated.

(2)

Efficiency ratio is determined by dividing non-interest expense before goodwill impairment by the sum of net interest income and non-interest income (excluding investment gains and net OTTI) for the periods indicated.

(3)

Non-interest expense is defined as non-interest expense before goodwill impairment.














 Three Months Ended  


 Twelve Months Ended  



 December 31 


 December 31 

Other Information


2012


2011


2012


2011

 Average earning assets 


$2,244,397


$2,283,655


$2,299,546


$2,265,091

 Average assets 


2,458,591


2,495,110


2,510,145


2,543,963

 Average interest bearing liabilities 


1,991,199


2,062,239


2,073,603


2,063,366

 Average shareholders' equity 


273,358


271,224


270,600


290,499

 Weighted average number of shares outstanding: 









    As used in basic earnings per share 


46,196,111


46,179,402


46,191,368


46,045,664

    As used in diluted earnings per share 


46,226,387


46,179,402


46,209,579


46,045,664












December 31


December 31



2012


2011

 Number of shares outstanding (net of treasury shares) 

46,326,484


46,228,984

 Book value per share 


$5.87


$5.75













December 31


December 31

Weighted Average Net Interest Rate Spread


2012


2011

 Yield on loans 


4.56%


5.01%

 Yield on investments 


2.36%


2.39%

 Combined yield on loans and investments 


3.82%


4.03%

 Cost of deposits 


0.63%


0.83%

 Cost of borrowings 


2.37%


4.75%

 Total cost of funds 


0.81%


1.11%

 Interest rate spread 


3.01%


2.92%

 

SOURCE Bank Mutual Corporation



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